Swiss market for sustainable investment funds continues to mature, aided by self-regulation 

Sustainability does not appear to be in vogue at the moment. This hardly comes as a surprise to the seasoned observer after all the attention it has received in recent years alongside the debate on climate change caused by human activity. The influential US political economist Anthony Downs noted this “issue-attention cycle” in relation to the environment as far back as 1972: 

“Public perception of most ‘crises’ does not reflect changes in real conditions as much as it reflects the operation of a systemic cycle of heightened public interest and then increasing boredom with major issues.” 

Indeed, while attention is subsiding after a number of minor breakthroughs, a solution still seems a long way off. We are still seeing temperature records broken on a regular basis, and extreme weather events are becoming more frequent and taking on unprecedented proportions. The most recent example came on 29 October this year, when the Spanish town of Chiva recorded 491 millimetres of rain in just eight hours – more than the average figure of 456 millimetres for an entire year.  

Is sustainable finance running out of steam? 

Interest in the field of sustainable finance also appears to be waning – at least if the headlines (even in the highbrow media) are to be believed. The 4 November 2024 issue of Neue Zürcher Zeitung reported stagnation among “green investments”, and there is evidence that the tide has turned in the US as well. BlackRock, the world’s biggest asset manager, wrote to its clients back in 2020, “we believe that sustainability should be our new standard for investing,” but the company’s CEO Larry Fink recently stated that ESG had been “entirely weaponised” by political factions.  

Is it therefore time to say goodbye to sustainable finance? Or, as the Financial Times puts it, should we already be asking “who killed the ESG party?” As is so often the case, these questions are easier to answer if we look at hard facts rather than headlines that are more about attracting attention than imparting knowledge. When we do so, things look rather different. Trends in sustainable investment funds – often used as a yardstick for interest in the subject – differ considerably from region to region. The US has in fact seen a clear decline over the past few quarters, whereas growth in Switzerland has merely slowed down. As the chart below shows, it remains in positive territory. The authors of the Sustainable Investments Study 2024 at the Lucerne University of Applied Sciences and Arts note that “the segment’s growth is converging with that of conventional funds”.  

Illustration: Annual net asset inflow rates of sustainable and conventional retail funds since 2020. Source: Institute of Financial Services Zug (IFZ), Lucerne University of Applied Sciences and Arts (2024) 

Switzerland is different 

An attentive reader might conclude that things are not looking so bad for sustainable finance in Switzerland after all, although the subject’s importance is waning here too. If we look in more depth at a broad range of data, however, even this interpretation seems too pessimistic. The figures for the fund market include a large number of foreign funds, units of which are also bought by investors outside Switzerland. If we focus our analysis solely on funds set up by Swiss-based retail banks, a clear picture emerges: “While sustainable funds offered by Swiss retail banks only have an aggregate market share of 56%, [...] they account for as much as 87% of total net asset inflows. This suggests that private investors have favoured sustainable funds over their conventional counterparts when allocating new capital in the past 12 months.” (Sustainable Investments Study 2024) One key reason for this is likely to be the self-regulation on preventing greenwashing published by the Swiss Bankers Association, the Asset Management Association Switzerland and the Swiss Insurance Association.  

Self-regulation delivering on its promise 

Even before the Federal Council published its position on greenwashing on 16 December 2022, the three industry associations had already addressed the issue and defined practicable measures based on the Financial Services Act in the form of voluntary self-regulation. These measures are intended to ensure that clients do not receive poor or incorrect advice on the subject of sustainability. Clients are now asked about their ESG preferences, and the products and services they are offered must be appropriate for these preferences. The guidelines also set out obligations for the provision of information, documentation and accountability when establishing the client’s ESG preferences. Member institutions are also obliged to include ESG topics in the training and professional development of their client advisors. 

The comparatively high asset inflows Swiss retail banks are posting prove that this approach is already a success. The Sustainable Investments Study 2024 also comes to this conclusion: “One driver of this trend in favour of sustainable funds may well be the new self-regulation from the Swiss Bankers Association (SBA) on integrating ESG preferences into investment advice. […] These new rules have probably caused retail banks to enlarge their offering of sustainable products – in some cases (see above), they have even switched over completely to sustainability. […] At the same time, the proportion of assets flowing into sustainable products is likely to have increased simply because banks are now required to ask about their clients’ sustainability preferences.” 

Another advantage of this approach was made evident earlier this year when the Guidelines for the financial service providers on the integration of ESG preferences and ESG risks and the prevention of greenwashing in investment advice and portfolio management were amended to reflect the Federal Council’s position in record time, with the new version entering into force on 1 September.  

Not just in investment advice, but in mortgages too 

The SBA has also developed a second self-regulation regime that is perhaps less in the public eye but no less successful for it. The purpose of the Guidelines for mortgage providers on the promotion of energy efficiency is to encourage those providers to consider long-term value retention, and consequently the energy efficiency of the building to be financed, when offering clients advice on financing a property. The intention is to make clients aware of the importance of energy efficiency upgrades. In its PACTA Climate Test Switzerland 2024, the Federal Office for the Environment (FOEN) notes that the self-regulation has already had a significant impact. It has led to an increase in the number of initial energy efficiency assessments as well as other systematic measures for all mortgages on the part of the banks themselves (not just when requested by clients). Over 70% of the participating banks stated even before the SBA guidelines for mortgage providers entered into force that they would implement them in full by 2024 at the latest. The same proportion claimed that all of their advisors were familiar with the guidelines. An especially interesting observation in this respect is that there has been a small spillover effect, with some asset managers, wealth managers and pension funds also adopting the SBA guidelines or intending to do so. 

Sustainable finance is here to stay 

As these brief remarks show, reports of the demise of sustainable finance are greatly exaggerated. In Switzerland especially, which boasts a long history and a number of pioneers in this field, integrating sustainability aspects into banking services has become a firmly established practice. This is not just a response to significant demand from clients, which is no surprise in itself in the country that ranks as the European leader in the consumption of organic products. It is also the case because taking environmental, social and governance factors into account with regard to both risks and opportunities makes sense for banks – even more so in a world increasingly fraught with volatility, uncertainty, complexity and ambiguity.